Evidence of meeting #53 for Finance in the 41st Parliament, 1st Session. (The original version is on Parliament’s site, as are the minutes.) The winning word was economy.

A recording is available from Parliament.

On the agenda

MPs speaking

Also speaking

3:35 p.m.

Conservative

The Chair James Rajotte

I call this meeting to order.

Good afternoon, ladies and gentlemen. It's a pleasure to be here today to welcome, pursuant to Standing Order 108(2) and our study on the report of the Bank of Canada on monetary policy, our witnesses today, the Governor of the Bank of Canada, Mr. Mark Carney—welcome, Mr. Carney—and the senior deputy governor, Mr. Tiff Macklem.

Thank you for being with us here, gentlemen. If I could just indulge you for two minutes, we have a couple of housekeeping items to deal with.

We have a motion by Mr. Mai. Also, we should welcome back to our committee Ms. Nash and Mr. Marston, et bienvenue à M. Caron au Comité permanent des finances. Welcome to the committee.

Mr. Mai, you have a motion to move very quickly, please.

3:35 p.m.

NDP

Hoang Mai Brossard—La Prairie, QC

I will quickly read the motion:

That the Standing Committee on Finance resume its study on tax evasion, that the evidence and documentation received by the committee during the third session of the 40th Parliament on the subject be taken into consideration by the committee in this session, that the committee further examine international tax planning in order to ascertain emerging best practices in foreign jurisdictions, and that the committee make recommendations to the Government of Canada to combat tax evasion and the use of tax havens.

Mr. Chair, I believe you will find unanimous consent for this motion.

3:35 p.m.

Conservative

The Chair James Rajotte

Okay.

Very briefly, I'll recognize Ms. McLeod, please.

3:35 p.m.

Conservative

Cathy McLeod Kamloops—Thompson—Cariboo, BC

Thank you. I'll just speak briefly.

Certainly we will be pleased to support the motion. It's always good to finish work. I appreciate the opposition indicating it will not repeat a lot of the work that had been done in the past, and we'll pick up. So again, we're pleased to support this important motion.

3:35 p.m.

Conservative

The Chair James Rajotte

Thank you.

All in favour?

Mr. Brison, you want to speak to this.

3:35 p.m.

Liberal

Scott Brison Kings—Hants, NS

Mr. Chair, we support this motion. We think it actually builds on some of the work the committee has done in the past. It's an important opportunity to evaluate best practices.

I think some of our work internationally in terms of cooperation with other governments makes this a particularly important area of public policy, where we can address this constructively and in a non-partisan way. So I support Mr. Mai's motion as well.

3:35 p.m.

Conservative

The Chair James Rajotte

Thank you, Mr. Brison.

(Motion agreed to)

I see that being unanimous. Thank you very much, colleagues.

Mr. Carney, Mr. Macklem, thank you so much for being with us. As you know, we have this session twice a year with you, and committee members appreciate it very much.

Mr. Carney, I believe you have an opening statement and then you'll have questions from members. Please begin your opening statement.

3:35 p.m.

Mark Carney Governor of the Bank of Canada

Thank you very much, Chair.

Good afternoon, members. Tiff and I are very pleased to be with you today to discuss our April monetary policy report, which the bank published last week. In it we note that the profile for global growth has improved since the bank released its January MPR. Europe is expected to emerge slowly from recession in the second half of this year, although the risks around this outlook remain high.

The profile for U.S. growth is slightly stronger. This reflects the balance of somewhat improved labour markets, financial conditions and confidence on the one hand, and emerging fiscal consolidation and ongoing household deleveraging on the other. Economic activity in emerging market economies is expected to moderate to a still-robust pace over the projection horizon, supported by an easing of macroeconomic policies.

Commodity prices remain elevated owing to improved global economic prospects, supply disruptions, and geopolitical risk. In particular, the international price of oil has risen further and is now considerably higher than that received by Canadian producers. If sustained, these oil price developments could dampen the improvement in economic momentum.

Overall, economic momentum in Canada is slightly firmer than the bank had anticipated in January. The external headwinds facing Canada have abated somewhat, with the U.S. recovery more resilient and financial conditions more supportive than previously anticipated. As a result, business confidence and household confidence are improving faster than forecast. The bank projects that private domestic demand will account for almost all of Canada's economic growth over the projection horizon.

In particular, household spending is expected to remain high relative to GDP as households add to their debt burden, which remains the single biggest domestic risk. Business investment is projected to remain robust, reflecting solid balance sheets, very favourable credit conditions, continuing strong terms of trade, and heightened competitive pressures.

The contribution of government spending to growth is expected to be quite modest over the projection horizon, in line with recent federal and provincial budgets. The recovery in net exports is likely to remain weak in light of modest external demand and ongoing competitiveness challenges, including the persistent strength of the Canadian dollar.

The bank projects that the economy will grow by 2.4% in both 2012 and 2013 before moderating to 2.2% in 2014. The degree of economic slack has been somewhat smaller than anticipated, and the economy is now expected to return to full capacity in the first half of 2013.

As a result of this reduced slack and higher gasoline prices, the profile for inflation is expected to be somewhat firmer. After moderating this quarter, both total and core inflation are expected to be around 2% over the balance of the projection horizon as the economy reaches its production potential, the growth of labour compensation remains moderate, and inflation expectations stay well anchored.

Despite recent improvements to the outlook for the global and Canadian economies, risks remain elevated. The three main upside risks to inflation in Canada relate to the possibility of higher-than-expected oil prices, stronger-than-expected growth in the U.S. economy and stronger momentum in Canadian household spending.

The two main downside risks to inflation in Canada relate to the reintensification of sovereign debt and banking concerns in Europe, and the possibility that growth in Canadian household spending could be weaker than projected.

Overall, the bank judges that the risks to the inflation outlook in Canada are roughly balanced over the projection period.

Reflecting all of these factors, on the April 17 the bank maintained the target for the overnight rate at 1%. In light of the reduced slack in the economy and firmer underlying inflation, some modest withdrawal of the present considerable monetary policy stimulus may become appropriate, consistent with achieving the 2% inflation target over the medium term. The timing and degree of any such withdrawal will be weighed carefully against domestic and global economic developments.

With that, Mr. Chair, Tiff and I will be pleased to take members' questions.

3:40 p.m.

Conservative

The Chair James Rajotte

Thank you, Mr. Carney, for your presentation.

We'll begin members' questions with Ms. Nash, please.

3:40 p.m.

NDP

Peggy Nash Parkdale—High Park, ON

Thank you very much.

Welcome. It's good to see you again.

You say in the report that one of the biggest challenges we're facing in Canada is the level of household debt or personal debt, and these debt levels are unsustainably high, especially with the likelihood of interest rates eventually rising. With these record levels of household debt, and persistent borrowing in spite of the economic conditions, what are the real risks that Canadian households face, and what are the risks to the Canadian economy?

3:40 p.m.

Governor of the Bank of Canada

Mark Carney

Thank you.

Just as one point of clarification, if I may, we didn't say that the levels of household debt are unsustainably high. We were talking about a dynamic in one of the technical boxes of a steady increase in home equity lines of credit. That's an unsustainable dynamic over time that is going to reach a new equilibrium and move from there.

But I think the thrust of your question is on point, which is that this is the biggest single domestic risk to the Canadian economy: the level of household debt and associated developments in the housing market. We have highlighted in the report that this is the major risk to the downside.

I would observe as well that the pace of accumulation of household debt has slowed over the course of the last two years. It has gone from running at a rate of about 9% or 10% per year to present figures, which are around 4% per year.

We think that is in part due to measures that have been taken, not least by the Superintendent of Financial Institutions, to tighten home equity line of credit underwriting standards to increase the capital standards for Canadian banks faster than they are being increased internationally, and in part due to measures that have been taken by the government on three separate occasions to tighten the mortgage insurance rules managed by CMHC, which helps reduce high-ratio mortgages.

But the point, we think, is that Canadians need to continue to be prudent in this environment—interest rates are exceptionally low—when taking on long-term debt, such as for mortgage rates, which are not always going to be this low. Indeed, in our projection we foresee the possibility of some withdrawal of this monetary stimulus over the course of the projection period. So in taking on new debt, Canadians need to think about the carrying cost of that debt over the lifetime of the loan or the mortgage, size it appropriately, and decide between the terms—fixed or variable—appropriately.

I will note as a final point that what we've also seen in recent months is that the proportion of variable rate debt on new debt that's being taken on—new mortgages that have been taken on—has gone down quite substantially and is running in the low teens at present.

3:40 p.m.

NDP

Peggy Nash Parkdale—High Park, ON

So people are locking in.

3:40 p.m.

Governor of the Bank of Canada

Mark Carney

New debt is locking in. The question is whether existing debt is similarly doing the same. Yes.

3:40 p.m.

NDP

Peggy Nash Parkdale—High Park, ON

So there are individual measures that people will take and will try to take. Are there further measures that the government can take? I guess I'm wondering, in the context of an era of government restraint and decreasing public investment, what impact you think that will have on the level of household debt. Are there further measures that the federal government can take to reduce household debt?

3:40 p.m.

Governor of the Bank of Canada

Mark Carney

I assure the member that authorities—the bank, the superintendent, CMHC, and the Government of Canada—are cooperating closely and monitoring the situation. As I referred to in my earlier remarks, a number of measures have been taken, both by the superintendent and by the government. We have a heightened vigilance with the underwriting practices of the banks, so on the supply side there's a variety of measures that have been taken and are resulting in the slowing of the accumulation.

There's always more that could potentially be done, but with these measures there has to be an element of prudence in balancing the pace of the slowing of this phenomenon with the underlying growth of the economy. Now, the housing sector is an important part of the economy; it's not the most important part of the economy. Our focus is on ensuring that this is a sustainable development in the housing sector going forward.

The combination of measures that have been taken, and a clear-eyed perspective of Canadians—which I think they have—that we are in exceptional circumstances in terms of interest rates and we won't always be in those exceptional circumstances, will do much to manage the issue.